Hong Kong's Peregrine Soared Like a Falcon, Sank Like a Reckless Bank

By EDWARD A. GARGAN

ONG KONG -- With the collapse of Peregrine Investments Holdings
on Monday, Asia's biggest underwriter of stocks has disappeared off
the map of Asian investment banking just one decade after it was
created by a swashbuckling former British racing driver and his
Hong Kong partner.

The factors behind Peregrine's downfall were many and complex,
and had much to do with its brash -- some would say insolent --
culture. Yet some executives at Peregrine, as well as financiers
familiar with its final days, said its demise became inevitable
only after First National Bank of Chicago, its lead banker and an
investor in the firm's putative restructuring, pulled out of a
proposed rescue effort and canceled a financing for Peregrine at
the last moment.

The flame-out of Peregrine, the largest investment bank in Asia
outside of Japan, spread panic through the Hong Kong stock market
and raised further questions about the depth and duration of the
economic crisis that is ravaging the fruits of more than a decade
of explosive regional growth.

Yet, in many ways, Peregrine's downfall was emblematic of the
fault lines in the foundations of Asia's once-vaunted economic
miracle. Its headlong rush to do deals, its reliance on connections
in high places, and its willingness to skim the edges of legality
and propriety mirrored the region's reckless economic growth and
its tolerance of widespread corruption and cronyism.

But even in a part of the world where risk-taking had become the
key to economic success, Peregrine stood out. It largely pioneered
the market for junk bonds in Asia. After cozying up to the Chinese
authorities in Beijing, it became the powerhouse behind virtually
every initial listing by Chinese companies on Hong Kong's stock
exchange. And it foraged markets -- Vietnam and Myanmar, for example
-- that few others would go near because of their horrendous
human-rights records.

On Monday, as Peregrine filed for liquidation, Hong Kong's stock
market plummeted 8.6 percent, continuing a meltdown that has
stripped it of more than one-quarter of its value so far this year.
Even so, Hong Kong monetary authorities played down the threat the
bank's collapse posed to the financial system. Donald Tsang, Hong
Kong's financial secretary, turned down Peregrine's request for
assistance over the weekend after a rescue package with a Swiss
financial group fell apart. Tsang said a bailout would not be "in
the public interest."

In the end, financial analysts here and elsewhere said, it was
arrogance that did Peregrine in -- an arrogance that emanated from
the personality of its founder, 51-year-old Philip Tose of Britain,
and his Hong Kong partner, Francis Pak To Leung, and that pervaded
the bank's culture. That arrogance, they said, led the company to
lend too much money for questionable projects and to exercise too
little high-level supervision over managers, and especially over
Andre Lee, who ran its highly profitable and nearly autonomous bond
department.

As a result, when Asia's financial crisis broke last summer,
Peregrine was ill-equipped to cope with the fallout. Indeed, it was
the failure of an Indonesian taxi-cab company that fatally
undermined Hong Kong's premier investment bank.

Sometime last summer, when bullishness was still the sentiment
of the day, Peregrine made a bridge loan of $260 million to Steady
Safe, run by one of Indonesia's flashiest wheeler-dealers, Jopie
Widjaya. Widjaya's dream was to move from his profitable but
humdrum Jakarta taxi business, with its fleet of 4,000 cabs, to
rail projects, ferries, and toll roads. Widjaya had the right
connections; he had even bought a stake in a toll road owned by
Siti Hardiyanti Rukmana, the eldest daughter of President Suharto.

Steady Safe had all the elements of a Peregrine-style deal:
access to the corridors of power, seemingly assured earnings, and
sweeping opportunity. The problem was that Peregrine lent the $260
million in American dollars -- fully one-third of Peregrine's
capital -- against Steady Safe's revenues in Indonesian rupiah. At
the time, Peregrine seemed convinced that the rupiah was sound, and
that it could soon resell the bonds backing the loan. Moreover, the
fixed-income team that cut the deal had earned 38 percent of
Peregrine's profits the previous year; this was just one more deal.

Analysts say such confidence was misplaced. Any lender
entrusting the equivalent of one-third of its capital to any
borrower, much less a little-known company in a country notorious
for corruption, shows poor financial judgment, they say.

But far from having second thoughts after the financial turmoil
that wracked Thailand last July spread throughout Asia, Peregrine
remained upbeat. In late October, even though the rupiah had by
then lost 30 percent of its value, Peregrine's own weekly
analytical reports, boldly titled Greed and Fear, argued that the
rupiah's collapse "certainly looks overdone and suggests a
countertrend rally may be overdue."

That same month, rumors began percolating in Hong Kong that
Peregrine had taken $1 billion in trading losses, rumors vigorously
denied by Tose. But even as he insisted on the bank's solidity, the
rupiah was slipping and Peregrine's chairman was looking for an
investor to replenish the company's capital.

In November, Tose announced that he had struck a deal with
Zurich Center Investments Ltd., part of Zurich Group, a Swiss
financial-services company, to buy a 24.1-percent stake in
Peregrine for $200 million. Peregrine's chairman was ebullient.

But the deal never went through.

According to Zurich Group, the two companies planned to set up
an Asian investment fund, called the Peregrine Direct Investment
fund, with a commitment of $50 million from each partner and an
expected infusion of $350 million to $500 million from
institutional investors.

But the continuing financial tumult in Asia apparently made
Zurich nervous. A spokesman declined to go into details about the
group's decision to back away, saying only it was the "end result
of the negotiations to rework the conditions" of Zurich's
participation.

Meanwhile, events in Indonesia tumbled out of control, and its
currency collapsed. Steady Safe, with its earnings in rupiah, could
no longer pay meet payments on its dollar loans, particularly the
huge loan from Peregrine. The taxi company's stock sank to a sliver
over one penny and, last week, it locked its doors.

As Peregrine's stock continued to slide, trading in the bank's
stock was suspended. As Zurich Group was preparing one final offer
to Peregrine, there seemed little hope of a deal. "When Zurich
came back last week," said a senior Peregrine official who only
agreed to speak anonymously, "they were going to buy our bond
portfolio for 16 cents on the dollar. The bond portfolio was
$600-million plus; there's a lot of good paper in that portfolio.
But when you have a situation where they say you have $260-million,
$270-million worth of bad paper, they say: 'What else have you
done?' It just snowballed."

At the table with Zurich was First Chicago, one of Peregrine's
principal creditors. At about one o'clock in the morning on Friday,
First Chicago left the negotiations. "Zurich walked away six hours
later," said the Peregrine official. "It just unraveled from
there."

A spokesman for First Chicago declined to comment on the matter.
But executives at both Peregrine and Zurich said on Monday that
First Chicago had initially pledged $25 million for a small stake
in Peregrine, then had a change of heart. First Chicago's departure
from the negotiations on Friday morning prompted Zurich's decision
to throw in the towel, they said, in part because it did not wish
to raise its stake in the company significantly beyond 24 percent.

"They did not want to go up to 35 percent and make a general
offer," as required by Hong Kong law whenever a buyer's stake
exceeds 30 percent, a Peregrine executive in Hong Kong said.

Meanwhile, Peregrine executives desperately tried to salvage
something from the fiasco, maintaining that the firm's brokerage
and corporate-finance businesses would make good acquisitions for
the right buyer. "We still have a first-class franchise and it
would be highly regrettable if that was not kept in tact," said
Timothy Voake, chief executive officer of Peregrine Brokerage Inc.,
which has headquarters in New York. "The level of support from the
client base has been remarkable."

After the collapse of negotiations in Hong Kong, a press
conference announcing a deal was abandoned. Swiftly, the Securities
and Futures Commission ordered Peregrine to stop all trading
activities. Peregrine's seat on the stock exchange was also
suspended.

Peregrine was bust. Scarcely six months ago, Peregrine was the
enfant terrible of Asian banking, a champion of "buccaneering" in
the words of Tose.

"One of Peregrine's great advantages in its heyday was to
commit its own capital rapidly to transactions, with bridge loans
for example," said Richard Margolis, a senior vice president at
Merrill Lynch (Asia Pacific) Ltd. "It could take decisions
quickly."

Peregrine was created in 1988 on $38 million raised by Mssrs.
Tose and Leung -- both refugees from Citibank's foundering
investment banking venture -- from some of Hong Kong's tycoons,
including Li Ka-shing, a leading property and infrastructure
developer, Gordon Wu, an Asian infrastructure developer, and Larry
Yung, China's principal investment banker here. Peregrine grew
exponentially, with Tose and Leung capitalizing on personal
contacts cultivated over the previous decade. Both men enjoyed
lavish life styles, including buzzing around Hong Kong in
Rolls-Royces.

Connections, combined with speedy decision-making and a penchant
for risk, catapulted the bank forward. And it rushed in where
others hesitated to tread. Typical was Peregrine's response to
China's massacre of civilians in Tiananmen Square in June 1989.
"These events were just a hiccup," Leung said in an interview two
years ago. "We decided we wanted to take advantage of depressed
market conditions at the time."

Quickly, Peregrine emerged as one of the largest underwriters in
Hong Kong. And while China and Hong Kong remained the core of the
bank's business, it spread its wings and splashed offices across 14
countries.

Even Asia's widespread culture of corruption did not seem to
trouble Tose. After all, he said in an interview with The South
China Morning Post last year, it is "quite an open form of
corruption."

"It is not stalling advances in Asia," he added, "but is an
accepted way of life in many ways."

Unfortunately for Peregrine, though, it ruffled the feathers of
local authorities in many of its forays. In Vietnam, it formed
Peregrine Capital Vietnam with a fast-talking nightclub owner and
car dealer named Nguyen Trung Truc, for example. Shortly afterward,
Truc's other businesses were raided by tax authorities, and he
wound up spending most of the year in jail for tax evasion.
Peregrine itself was fined for operating a business without proper
licenses.

Last June, although storm clouds were rapidly gathering on
Asia's economic horizons, Peregrine was buoyant. It reported hefty
profits for the first six months of $82.5 million on
revenues of $19.6 billion.

When the end came this past weekend, however, many people were
asking why Peregrine's vaunted connections with some of Hong Kong's
wealthiest and most powerful people did not result in the firm's
rescue.

As Monday wore on, hundreds of brokerage customers shuttled in
and out of Peregrine's brokerage operations to close their
accounts.

"I was very surprised," said K. Chan, a 60-year-old retiree.
"I've been with Peregrine for six or seven years. I'm going to
transfer my stocks to another company." But, Chan continued, Hong
Kong was not to blame. "What happened to Peregrine was caused by
external forces, the Southeast Asian currencies. It's not because
of Hong Kong itself."